It will also affect investors directly and indirectly, by introducing more administrative complexity when investing offshore and possible economic repercussions. STANLIB’s Chief Compliance Officer, Njabulo Duma, answered some of the most pressing questions about the implications of grey listing for advisers’ business and their clients’ investments below. For more background, also read his views on the subject published in August 2022 here.

What does grey listing mean?

Criminals and terrorist financiers are attracted to jurisdictions with lax or ineffective legal frameworks, as they can successfully launder money or move assets to finance terrorism through the financial system.

A country’s membership to FATF or commitment to upholding the FATF Recommendations is, by itself, a show of good faith. It demonstrates that a country is committed to combating money laundering (ML), terrorist financing (TF) and proliferation financing (PF) within its own financial system and is less likely to introduce that risk into the global market. However, that commitment must be supported by actual frameworks and measures within the country, aligned to the FATF Recommendations.

The FATF continually conducts mutual evaluations to identify countries with weak or inadequate ML/TF/PF control measures and works with countries to address weaknesses identified in their mutual evaluation report (MER). A MER serves as an indicator to FATF peers and the global market, of the risks emanating from the evaluated country.

But, if a country does not make enough substantial progress within a certain amount of time, it will be publicly listed by the FATF. This puts pressure on countries to address their deficiencies to maintain their position in the global economy, and the prospect of public identification encourages countries to swiftly make significant improvements.

What/Who is the FATF?

The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. It was established in 1989, operating as an inter-governmental body to set international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

Why was SA reviewed?

The FATF is an inter-governmental body consisting of approximately 39 members, with more than 200 countries and jurisdictions committed to implementing the FATF Recommendations.

The FATF conducts reviews of every member country on an ongoing basis to assess levels of implementation of the Recommendations, providing an in-depth description and analysis of each country’s system for preventing criminal abuse of the financial system. Because the reviews are conducted by other member countries and regional bodies, these are referred to as peer reviews or mutual evaluations.

Before membership is granted, the relevant in-country ministers, representatives of the parliament and competent authorities provide a written commitment, to comply with the FATF Recommendations. The country will also undergo a mutual evaluation during the membership process, to assess compliance with FATF membership criteria.

Once a country is successfully submitted as a member, it will report back to the FATF on a regular basis on the progress it has made. After three years, the country is generally expected to have addressed most or all the technical compliance deficiencies identified.

After five years, the FATF conducts a follow-up assessment which looks at the priority actions from the mutual evaluation, the reforms the country has introduced to improve the effectiveness of its actions to protect the integrity of the financial system, and the country’s compliance with the FATF Recommendations.

South Africa (SA) became a FATF member in 2003. Since then, SA has undergone two formal mutual evaluations with the final reports issued in 2009 and 2021 respectively.

What is the expected impact on ordinary investors?

For STANLIB clients invested in offshore funds, we expect business to continue as usual. Our offshore funds are Jersey-domiciled, and we already comply with the stringent controls in this jurisdiction. We will continue to manage your funds as before and our teams will continue to assist you with transactions and information. Generally speaking, offshore investment providers will be expected by their own regulatory authorities to be stricter about accepting the risk of South African-originated transactions. This may result in:

• Delays in the execution of offshore transactions.
• Requests for information and documents that you would not ordinarily have provided to offshore investment providers and/or had to provide in past engagements, since additional caution (and onerous due diligence processes) will be entailed in dealing with South African investors.
• Investors may be required to ensure all the information they provide is verified/verifiable and provide recent certification of documents. If documents were issued by South African institutions, offshore providers will have to invest in processes to verify them.

Will my offshore investments be affected?

It is important to note that a decision that is based on a country’s risk is mainly universal and the impact on our investments is comparable to the impact other South African investors.

For STANLIB clients invested in offshore funds, we expect business to continue as usual. Our offshore funds are Jersey-domiciled, and we already comply with the stringent controls in this jurisdiction. We will continue to manage your funds as before and our teams will continue to assist you with transactions and information.

What is the potential impact on advisers’ businesses?

• Adviser firms with international partners or counterparties could face additional administrative costs and delays if more stringent requirements are put in place.
• Your interaction with STANLIB in respect to offshore investments and transactions is expected to remain unchanged. Our offshore funds are Jersey-domiciled, and we already comply with the stringent controls in this jurisdiction. We will continue to manage your funds as before and our teams will continue to assist you with transactions and information.

What are the likely macroeconomic consequences of the grey listing?

It is difficult to comment on the impact to SA should it be grey listed, given the country’s unique political, economic and regulatory landscape. The impact experienced by other countries may give an indication of what could be expected:

• The EU, UK and US already consider that SA poses higher money laundering and terrorist financing risks and it is probably on the EU and UK blacklists[1]. When Botswana and Mauritius were grey listed, they were automatically put on the EU’s list of non-co-operative jurisdictions and the UK’s list of high-risk countries.
• Financial markets could react negatively. The extent of that reaction will be determined by how much it has already been priced in.
• Institutions like the IMF and World Bank are observer members of FATF and have a duty to advance the ideals of FATF. As a result of this announcement, they would take a dim view of SA.
• In other jurisdictions, grey listing had a negative impact on countries’ GDP. The cumbersome requirements of being a high-risk jurisdiction are expected to result in a further decline in foreign direct investment in the short to medium-term. Pakistan, the economy of which is similar in size to ours, lost an estimated R600 billion of economic activity in 2018 and 2019 as a result of grey listing.
• Development Finance Institutions (that support SA in addressing fiscal and financing requirements) are expected to add a risk premium to their lending terms to SA, which will increase the cost of capital.
• Access to international trade and financial systems may be constrained, specifically in the UK, US and Europe. The internal regulatory requirements of these jurisdictions insist on enhanced due diligence for all entities and transactions originating from countries on a grey list. 

What will it take to get off the grey list, and how long is this expected to take?

SA will need to address the strategic deficiencies in its anti-money laundering and countering the financing of terrorism (AML/CFT) framework identified by the FATF. The FATF will also need to be confident of SA’s capacity to deliver accountability for state capture crimes, and to recoup the funds looted from state institutions by guilty parties.

We are hopeful that a sustained, united, rigorous and co-ordinated effort by the relevant stakeholders will remediate SA’s shortcomings and result in its swift removal from the grey list. However, this is not guaranteed, and we encourage advisers to prepare for the possibility of a longer remediation period.

Can the situation deteriorate further? Is there a blacklist?

Given SA’s high-level commitment to working with the FATF, it will remain in the grey list. The worst case scenario is that the remediation process could take longer than expected. The FATF maintains two public lists of countries with weak AML/CFT regimes: “jurisdictions under increased monitoring” (called the “grey list”) that are actively working with the FATF to address strategic deficiencies in their regimes; and “high-risk jurisdictions subject to a call for action” (the “blacklist”) that are not actively engaging with FATF to address these deficiencies. There are only two countries on the blacklist: Iran and North Korea. Before the addition of SA, the grey list contained about 23 countries, like Syria and Haiti.

What does an investor need to do?

While this is the first time South Africa gets grey listed since joining the FATF in 2003, the country has shown some resilience in a number of difficulties in the past.

For investors, it is recommended that you consult your financial adviser to review the potential impact on your personal financial position.

[1] these are lists of countries deemed ‘high risk’ under the EU’s and UK’s AML Directive and Regulations, respectively – i.e., those whose AML/CFT regimes have strategic deficiencies which pose a significant threat to the EU’s financial system.